Behavioral Economics Is Not All That

An excellent editorial today in the NY Times – Economics Behaving Badly by George Loewenstein and Peter Ubel. The basic gist – behavioral economics, while important, has limits; traditional economics still matters greatly for policy; behavioral economics is being used in politics as an avoidance mechanism (hmm, sounds behavioral?) when traditional economic solutions would be better though politically more difficult.

So to repeat:

[Behavioral economics] has its limits. As policymakers use it to devise programs, it’s becoming clear that behavioral economics is being asked to solve problems it wasn’t meant to address. Indeed, it seems in some cases that behavioral economics is being used as a political expedient, allowing policymakers to avoid painful but more effective solutions rooted in traditional economics.

They use two main examples – obesity and conflicts of interest in medicine, like the drug industry giving lavish gifts to doctors.

Take, for example, our nation’s obesity epidemic. The fashionable response, based on the belief that better information can lead to better behavior, is to influence consumers through things like calorie labeling — for instance, there’s a mandate in the health care reform act requiring restaurant chains to post the number of calories in their dishes.

Calorie labeling is a good thing; dieters should know more about the foods they are eating. But studies of New York City’s attempt at calorie posting have found that it has had little impact on dieters’ choices.

Obesity isn’t a result of a lack of information; instead, economists argue that rising levels of obesity can be traced to falling food prices, especially for unhealthy processed foods.

To combat the epidemic effectively, then, we need to change the relative price of healthful and unhealthful food — for example, we need to stop subsidizing corn, thereby raising the price of high fructose corn syrup used in sodas, and we also need to consider taxes on unhealthful foods. But because we lack the political will to change the price of junk food, we focus on consumer behavior.

As they point out, behavioral economics tries to understand how and why people behave irrationally, using elements from psychology to examine deviations from rational choice. The general prescriptions from this policy approach are to manage how options are presented and to present better information so that people better understand the real costs and benefits. Loewenstein and Ubel don’t go so far as to say that these policy solutions still remain rooted in rational man assumptions – individual choice, better information, costs and benefits – but it is rather obvious. And that’s part of the problem.

Behavioral economics reinforces the individual and rational biases there in psychology and economics, rather than addressing community, institutional, and meaningful aspects of people’s lives. In this sense, it’s not too surprising that the pay-off from behavioral economic solutions is not that great.

Prime Minister David Cameron of Britain recently promoted behavioral economics as a remedy for his country’s over-use of electricity, citing what he claimed were remarkable results from a study that reduced household electricity use by informing consumers of how their use compared to that of their neighbors.

Under closer scrutiny, however, tests of the program found that better information reduced energy use by a mere 1 percent to 2.5 percent — modest relative to the hopes being pinned on it.

Compare that with the likely results of a solution rooted in traditional economics: a carbon tax would instantly bring the price of energy into line with its true cost and would unleash the creative power of the marketplace to generate cleaner energy sources.

Still, it’s quite refreshing to have two such distinguished professors saying that what matters is looking at the true costs of things. Nothing irrational about that!

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5 thoughts on “Behavioral Economics Is Not All That”

“Behavioral economics reinforces the individual and rational biases there in psychology and economics, rather than addressing community, institutional, and meaningful aspects of people’s lives. In this sense, it’s not too surprising that the pay-off from behavioral economic solutions is not that great.”

Exactly. All of the assumptions about rational choices and universal human behavior are just that–assumptions. And behavioral econ is trying to encourage people to conform to an assumed rationality that may not have any actual meaning or relevance in a particular community. Explaining poverty or poor diet in terms of rationality or irrationality makes absolutely no sense to me. People aren’t poor or eating low quality foods simply because they don’t have perfect information about “the market,” after all.

I have posted a few critiques of Behavioral Economics over at my own blog. Basically I think you and Ryan hit the nail on the head when you ask about the systemic and historical factors that affect both individual decision-making and the economy as a whole. I also think that there’s a major flaw in that behavioral economists argue for arranging things so that people will make the “right” decisions. But who gets to decide what the “right” decisions are? As if we need some enlightened bureaucracy to make decisions for us and “nudge” us in the right directions. I don’t know, there’s something more than a little sinister in that line of reasoning.
Very interesting. Thanks!

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